The consequence of section 7C is that the difference between the interest rate charged and the official interest rate of 8% on a loan made by a connected person to a trust will be treated as an ongoing and annual donation on the last day of the tax year and will be subject to donations tax at a rate of 20%.
The Explanatory Memorandum of the Taxation Laws Amendment Bill issued by SARS on 15 December 2016 explains the thinking of SARS relating to loans created by the vesting of awards in a beneficiary without paying such awards to such beneficiary.
It states that –
“An amount that is vested irrevocably by a trustee in a trust beneficiary and that is used or administered for the benefit of that beneficiary without distributing or paying it to that beneficiary will not qualify as a loan or credit provided by that beneficiary to that trust if –
- The vested amount in terms of the trust deed governing that trust not be distributed to that beneficiary, e.g. before the beneficiary reaches a specific age; or
- That trustee has the sole discretion in terms of that trust deed regarding the timing of and the extent of any distribution to that beneficiary of such vested amount.
An amount vested by a trust in a trust beneficiary that is not distributed to that beneficiary will, however, qualify as a loan or credit provided by that beneficiary to that trust if that non-distribution results from an election exercised by that beneficiary or a request by that beneficiary that the amount not be distributed or paid over, e.g. if the beneficiary has reached the age at which a vested amount must be paid over or distributed to him or her and
- The trustee accedes to a request by that beneficiary that this not be done; or
- The beneficiary enters into an agreement with the trustee in terms of which the amount may be retained in the trust.”
Clients should re-visit their trust deeds in order to establish whether it makes provision for circumstances where it will be possible for a beneficiary credit loan account not to be subject to section 7C.